Private equity's Guy Hands gives up €40m in bonuses

Monday 2 March 2009 15.31 EST
First published on Monday 2 March 2009 15.31 EST

Private equity firm Terra Firma, which came to prominence with the purchase of music publisher EMI, today shocked the industry with a commitment to hand back €80m (£70m) of performance fees generated since 2004.

Guy Hands, the chief executive, said the firm's partners would waive the carried interest earned over the past four years in recognition of a steep fall in asset values. Hands was due to receive €40m of the fees. The move is expected to put pressure on rival firms to hand back performance fees for investments that have since turned sour.

Royal Bank of Scotland's former boss, Sir Fred Goodwin, who is under pressure to hand back half his pension pot, earned more than £7m in performance fees in the four years before the bank was taken into government control.

Terra Firma said a €1.3bn fall in EMI's value had wiped out gains in other areas of the business and forced the repayment of carried interest built up in a separate account at the firm.

Commenting in the firm's annual report, Hands said: "Terra Firma will in March distribute back to investors the carried interest [payments for strong investment performance] that had previously been earned … and which would have formed the bulk of the reward for Terra Firma's senior team's hard work since 2004. This is absolutely right; our investors have suffered and therefore our rewards should suffer at the same time."

In a swipe at the bankers behind the crisis, he added: "Such longer term rewards throughout the entire financial system would have led to a very different world to the one we find ourselves in today."

The company was forced to make the repayments under agreements signed with investors. Few of the company's rivals have similar deals.

A source close to the company said Hands was keen to distance himself from bankers who clung to their fees despite losing billions for their investors.

Hands said in the report: "The short-term bonus culture of most financial groups meant that many senior executives were incentivised to ignore or avoid longer term risks, whilst enjoying extraordinary short-term gains."

Hands, who argued for a return to sensible banking based on a split between utility banks and separate investment houses, also blamed governments, which he said were guilty of double standards.

"Over the past several decades, government budgets – and in the US, political campaigns – have been major beneficiaries of the short-term bonus culture. As income tax revenues soared, politicians were able to fund pet projects without concern for the longer-term fiscal consequences. Now rueing their unsustainable largesse, they have become finance's harshest critics," he said.

In a separate move private equity firm Candover said its funds had collapsed in value by more than 50%. It joined a growing list of debt-laden firms to signal that the credit crunch had forced them to shrink operations, curtail investment and cut jobs. Chairman Gerry Grimstone said that despite holding a wide range of businesses in the company's three major funds, a dependence on debt funding during a credit squeeze had hit hard. His answer was to cut off funding to the 2008 fund in favour of its more mature, and better placed, 2001 and 2005 funds. He said partners would forgo bonuses this year.

SVG Capital, like Candover, a London listed private equity firm, was also in trouble after its one-for-one rights issue offer was backed by only 53.2% of eligible shareholders.

Last year SVG, a spin-off from investment bank Schroders in the 1990s, announced plans to raise up to £209m as it looked to boost its cash position to meet the future funding needs of European private equity firm Permira's fourth fund, in which it is the largest investor.

Investors were also bruised by results posted by KKR Financial Holdings, a debt fund managed by private equity firm Kohlberg Kravis Roberts. The firm, which bought British chemist chain Alliance Boots at the height of the market in 2007, reported a quarterly loss and said it would not pay a dividend for the fourth quarter of 2008 and probably not for 2009.

The publicly traded fund, which invests in such assets as corporate loans, high-yield corporate bonds and distressed debt securities, did also not pay a third-quarter dividend.